Value at Risk - The Square Root Rule
(2012) NEKN01 20121Department of Economics
- Abstract (Swedish)
- This paper tests the “Square Root Rule” (the SRR), a Basel sanctioned method of scaling 1-day Value At risk to higher time horizons. The SRR has come under serious assault from leading researchers focusing on its week theoretical basis: assuming i.i.d. asset returns. I performed an empirical test of the SRR on the 10-day horizon, the maximum horizon allowed by Basel, comparing SRR performance to directly estimating 10-day VaR by the same method 1-day was estimated, the “main-model”. This test was performed for a number of well-known models. Performance was measured by means of Basel’s own criteria for back-testing, the Christoffersen test and through general descriptive statistics. My results were that the SRR performs less well than its... (More)
- This paper tests the “Square Root Rule” (the SRR), a Basel sanctioned method of scaling 1-day Value At risk to higher time horizons. The SRR has come under serious assault from leading researchers focusing on its week theoretical basis: assuming i.i.d. asset returns. I performed an empirical test of the SRR on the 10-day horizon, the maximum horizon allowed by Basel, comparing SRR performance to directly estimating 10-day VaR by the same method 1-day was estimated, the “main-model”. This test was performed for a number of well-known models. Performance was measured by means of Basel’s own criteria for back-testing, the Christoffersen test and through general descriptive statistics. My results were that the SRR performs less well than its “main-model” alternative, but overall only slightly so. Based on this I claim that SRR usage as a thumb-rule is certainly defensible, and that even in circumstances calling for exact measures it’s difficult to rule out SRR-scaling. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/2426134
- author
- Elsner, Yair
- supervisor
- organization
- course
- NEKN01 20121
- year
- 2012
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Value At Risk, VaR, scaling, risk, risk-measurement, financial risk, downside-risk, Basel
- language
- English
- id
- 2426134
- date added to LUP
- 2012-04-04 13:43:06
- date last changed
- 2012-04-04 13:43:06
@misc{2426134, abstract = {{This paper tests the “Square Root Rule” (the SRR), a Basel sanctioned method of scaling 1-day Value At risk to higher time horizons. The SRR has come under serious assault from leading researchers focusing on its week theoretical basis: assuming i.i.d. asset returns. I performed an empirical test of the SRR on the 10-day horizon, the maximum horizon allowed by Basel, comparing SRR performance to directly estimating 10-day VaR by the same method 1-day was estimated, the “main-model”. This test was performed for a number of well-known models. Performance was measured by means of Basel’s own criteria for back-testing, the Christoffersen test and through general descriptive statistics. My results were that the SRR performs less well than its “main-model” alternative, but overall only slightly so. Based on this I claim that SRR usage as a thumb-rule is certainly defensible, and that even in circumstances calling for exact measures it’s difficult to rule out SRR-scaling.}}, author = {{Elsner, Yair}}, language = {{eng}}, note = {{Student Paper}}, title = {{Value at Risk - The Square Root Rule}}, year = {{2012}}, }